Is the 9% increase in public transport fares…fair?

Fare revenue per passenger kilometre for selected cities ($)

Many people are outraged that the Government has dared to increase public transport fares in real terms. From 1 January, fares in Melbourne will rise by around 9%, well in excess of the rate of inflation (3.6% for the 12 months to the September Quarter).

From what I can make out, I don’t think anyone is questioning the need to increase revenue for public transport. For all its virtues, the system needs billions spent on things like improved signalling, track upgrades and duplications, more train sets, new rail lines, improved security, and much more. Patronage has grown at around 5% p.a. and that increases costs. Indeed, spending more to improve the system is the key to sustaining increasing patronage.

So the issue is not about the need for more money, but rather about where it should come from i.e. who should pay. Additional revenue for higher capital and operating purposes can only come from a limited range of sources. The main possibilities are:

• From passengers via fares;
• From taxpayers generally (by foregoing expenditure elsewhere in the Transport portfolio or beyond);
• From efficiency improvements e.g. reduced fare evasion, less restrictive work practices;
• From the beneficiaries of the public transport system e.g. land value capture, levies on city centre businesses;
• From other transport activities with undesirable side-effects e.g. congestion pricing; levy on car registration.

Each of these sources might be able to contribute something, but the revenue task is huge and there are practical and political limits to how much each can put in.

Fares are an important tool because they directly link supply and demand and they have history. Paying for service is a well established principle in public transport – there are very few public transport systems around the world that don’t charge fares.

Melbourne public transport users already get a pretty good deal – their fares recover none of the capital costs and only 44% of operating costs. Moreover, judged against some other cities, Melbourne’s fares aren’t especially high compared to the cost of providing the service (see exhibit).

The key market for the system is CBD workers who on average are reasonably well paid relative to their counterparts in other parts of the city. Further, a significant proportion of public transport users already benefit from concessional fares.

Those who argue that funding should come from general revenue rather than from passengers don’t always think about what would have to be foregone. They often implicitly imagine it would be at the expense of something they personally see as valueless or negative (new freeway construction is a common target).

But there’s nil guarantee of that. Any such decision would be made by the Government of the day according to its priorities and values. It might come at the expense of a very worthy transport project or it might come at the expense of another portfolio, perhaps a highly emotive one like education, health or community services. This attitude just shifts the problem to somewhere else where it might possibly impact others with less capacity than CBD workers.

In the short term – and this increase will take effect within four weeks – there are really only two choices: raise fares or fund the increase from elsewhere in the budget. In the longer term however there are possible alternatives to future fare increases. Read the rest of this entry »